Audit Engagement Letter: Definition, Format, Example, Contents

Audit Engagement Letter – It is a legally-binding contract that each of your clients and you have signed. In essence, it’s a letter that proves that every one of your customers has entered into a legally binding contract with you.

According to auditing standards, the auditor and the client must reach a mutual understanding of the parameters of the relationship. A letter of engagement is the standard form for such written agreements.

An engagement letter is typically sent before work begins to protect the interests of the customer and the auditor.

In this piece, we’ll discuss the value of an audit engagement letter and the specifics you should put in it to avoid any future awkwardness in communicating with customers.

What is an Engagement Letter in Auditing?

The auditor’s acceptance of the appointment is documented in the engagement letter, along with the audit’s purpose and scope, the auditor’s responsibilities to the client, and the format of any reports.

Who Prepares an Audit Engagement Letter?

The auditor prepares the audit engagement letter before sending it to the client.

A copy of the signed letter is returned to the auditor if the customer accepts the terms of the letter. This action signifies the beginning of an audit engagement between the parties.

What is the main Advantage of an Audit Engagement Letter?

An audit engagement letter is sent out at the outset of the audit process to prevent any confusion about the audit. The purpose of the engagement letter is to formalize the auditor’s acceptance after they have been appointed.

What is an Audit Engagement Letter?

An audit engagement letter is a formal agreement between you and your client that defines the scope of your work as an auditor, the client’s responsibilities, the projected audit length, and your fee.

Meaning the auditor’s acceptance of the audit and its aim, scope, and extent are all detailed in the engagement letter.

Objectives of Audit Engagement Letter

1. It eliminates room for confusion between the customer and the auditor by outlining the scope of the auditor’s duties.
2. The extent of any extra labor or customization is also established.
3. An internal control review is shared with management to plan audit procedures.
4. The client has stated the statutory requirements of the company’s ordinance, so the auditor is free to report on the topic he is not satisfied with.
5. The client is informed that unearthing fraudulent activity is not the primary focus of the audit.
6. The client is aware of the underlying principles used in the calculation of frees.
7. It formalizes the auditor’s agreement to his role, the parameters of the audit, and the format of his report.
8. The auditor educates the client about the additional expert services he or she offers.
9. The customer learns that the appointment of an auditor does not relieve the directors of their statutory duties.

Contents of Audit Engagement Letter

The specifics of an audit engagement letter will depend on the needs of each customer, but they should always address the following areas:

1. Auditor’s Responsibilities
2. Management’s Responsibilities
3. The relevant financial reporting framework
4. Scope and Objective of Audit
5. Management’s Representations
6. Irregularities and Fraud
7. Other services
8. Estimated fee and billing schedule
9. Confirmation and Signature

Actions to Take Before Accepting an Audit Engagement

1. Determine the honesty of the management.
2. Determine exceptional conditions.
3. Identify the level of skill required to conduct an audit.
4. Evaluate independence.
5. Assess the capacity for using appropriate care.
6. Make ready the Audit Engagement Letter.

Example of an Audit Engagement Letter

[Company’s letterhead]

[Date]

[The Directors]
[Name and Address of the Client]

AUDIT ENGAGEMENT LETTER

This letter will certify the specifications and constraints of the audit services our company, [Company’s name], has committed to providing services to the Client for the year ending [Date].

We will perform a full audit of the consolidated financial statements as of [Date] and the corresponding consolidated statements of income, retained profits (deficit), and cash flows for the year then ended, for the purpose of rendering an opinion thereon.

Management of the Company is accountable for the financial statements. This includes making sure adequate accounting records are kept, using sound accounting principles, keeping assets secure, and following all applicable rules and regulations. Additionally, administration must provide us with access to all relevant financial documents and data.

As auditors, we are only obligated to provide an opinion on the financial statements for the time period we actually examined. If there is a possibility that we will not be able to provide you an unqualified opinion, we will let you know why. We reserve the right to not issue a report or offer an opinion on the engagement’s results if we are unable to finish the audit or have not developed an opinion.

General Accepted Auditing Principles will serve as the basis for our audit. Following these guidelines, we will conduct the audit in order to determine with some level of confidence whether or not the financial statements contain any major misstatements. Since there is always some chance that some significant misstatement of funds has gone unnoticed, we cannot give any assurance that the financial statements are correct and accurate.

When conducting an audit, relevant documentation is sampled and reviewed to verify the financial statements’ quantities and disclosures. Overall financial statement presentation, accounting policies, and important estimations made by management are also evaluated during an audit.

As part of our procedure, we will learn about the internal control structure of the organization and perform tests of that system as we see fit. We will verify receivables and certain other assets and liabilities by communicating with a subset of customers, creditors, legal counsel, and banks to check the accuracy of the information in the accounts and the authenticity of the supporting documentation. When we’re done with our audit, we’ll need you to confirm a few things in writing about the financial statements and the circumstances surrounding them.

Although the audit is intended to reveal errors and inconsistencies that are material to the financial accounts, the audit is not intended to, and should not be relied upon to, reveal every instance of fraud, theft, embezzlement, or other unlawful or dishonest conduct. Nonetheless, we will let you know about any major mistakes and any anomalies or unlawful activities that we discover, unless they are really minor.

If you want to cite our company in a publication or reproduction of the financial statements, you must first provide us printer’s proofs or masters so that we can inspect them and give our final approval. In addition, before distributing the duplicated material, you’ll send us a final copy for review.

As part of our engagement for the year ending [Date], we will look over the Client’s federal and state income tax returns.

Furthermore, we will be accessible throughout the year for consultation on the tax implications of any company transactions or policy changes you may be considering.

In a supplementary document, we detail the help your staff will provide, including the creation of schedules and assessments of accounts. If we can get this done on time, our audit will go much more smoothly.

Our fees are calculated based on the total amount of time invested in the project plus any additional costs incurred. Payment is due immediately upon delivery of invoice. Your total fees are estimated to be between $___________ to $___________ while being paid the hourly rate of $______ / hour and we will let you know right away if anything comes up that could cause that estimate to change.

All documents generated over the course of this engagement are proprietary to our company and contain proprietary and confidential information; we will keep these documents in accordance with our policies and procedures.

We will notify you of any discrepancies we find with applicable laws and regulations, as well as any possibilities we find for operational efficiencies and for improved internal administrative and accounting controls, during the course of our audit. You will receive written feedback and suggestions from us on these subjects.

Our capacity to deliver nonattest services may be constrained during the term of this engagement and for the time covered by this engagement due to the provisions of Government Auditing Standards.

Please confirm your comprehension by signing the enclosed copy and returning it to us as soon as possible.

The chance to be of service to you is much valued, and we hope that our working relationship with you will be fruitful and enjoyable.

Sincerely,

______________________________                         

Date: ____________________

Print Name ______________________________

 

______________________________
Client Signature

Date: __________________

Print Name ______________________________

Please note the following:

1. This letter needs to be signed in duplicate. Both the auditor and the customer should keep a copy.
2. Every year, the auditor should determine if there have been any material changes that need issuing a new letter. This correspondence needs to be saved in the archive until it is replaced.
3. The audit engagement team might modify this sample letter to meet their specific needs. The content of this letter needs to reflect the specifics of the engagement that the firm has agreed to take on.

Lastly, several threats might affect your accounting firm, particularly if you provide auditing services, so it is important to take precautions.

Issues with the audit client can be avoided in most cases with a well-written, well-timed audit engagement letter.

Also see: How To Prepare For A Financial Audit 2022

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